Why we should worry less about retirement – and leave super at 9.5%


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Most retirees are financially secure. Many earn more than they did while working, the Grattan Institute finds.
Shutterstock

Brendan Coates, Grattan Institute; John Daley, Grattan Institute, and Jonathan Nolan, Grattan Institute

It’s conventional wisdom that Australians don’t save enough for retirement. Most workers themselves think they won’t have enough to retire on, and their concerns are rising.

But the conventional wisdom is wrong.

Our new report, Money In Retirement: More Than Enough shows that most people who are actually retired feel more comfortable financially than the Australians younger than them who are still working.

Retirees of today tend to slow their spending as they age, tend to keep saving in retirement, and often leave an legacy almost as big as the nest egg they had on the day they retired.




Read more:
The myth of the ageing ‘crisis’


When surveyed today the retirees of the future might be worried about their retirement, but economic growth means they will almost certainly be on even higher incomes than retirees today.

These findings might seem surprising: they contradict the repeated messaging from the financial services industry that Australians won’t have enough for retirement.

But that industry’s claims are based on research that overlooks two important points.

Retirees spend less over time

Much of the research assumes that retirees need to save enough to enable their incomes to keep climbing throughout their retirement in line with general wage growth.

Implicitly, it assumes that a retiree needs to spend 25% more at age 90 than at age 70, after accounting for inflation.

But our analysis shows that retired Australians tend to spend less over time, even those who have money to spare.



Young retirees might chalk up frequent flyer points, but they do it less as they get older.

Spending tends to slow at around the age of 70, and falls rapidly after age 80, to just 84% of what was spent at retirement age.

Even the wealthiest retirees spend less as they age. At the other end of the scale, pensioners receive discounts on everything from car registration to rates.

Our research finds that retirees spend less over time on food, alcohol, tobacco, clothes, furnishings, transport and recreation.



They spend more on health care as they age, but Medicare largely shields them from the full costs. The modestly higher out-of-pocket costs they do pay are mainly due to rising premiums for private health insurance.

Not only do most retirees not draw down their savings throughout retirement, many add to them.

Even among pensioners, one recent study found that the median (typical) pensioner still had 90% of what he or she retired on after eight years.




Read more:
Poor and rich retirees spend about the same


This means that calculations about the adequacy of retirement savings ought to be based on whether they are enough to maintain buying power (at best) rather increase it in line with wage growth.

Many prominent studies also ignore non-super savings, which are material, especially for wealthier households.

They lead to misguided calls for ever-higher super contributions in order to ensure reach the point where super alone is enough to provide an adequate retirement income, even though many households will have income from other sources.

Most will have enough super

Our modelling shows that people starting work today will have adequate retirement incomes: workers of all income levels will retire on incomes at least 70% of their pre-retirement earnings – the so-called replacement benchmark used by the Organisation for Economic Cooperation and Development and the Mercer Global Pension Index.



In fact the median (typical) worker can expect a retirement income of 91% of his or her pre-retirement income.

This means that many low-income Australians will actually get a pay rise on retirement.

Even workers in their 40s and 50s today – many of whom didn’t benefit from the present high rate of compulsory super contributions for their entire working lives – can expect a retirement income of about 70% of their pre-retirement incomes.

So compulsory super can stay at 9.5%

It means that that there is no obvious case to lift compulsory super contributions from 9.5% to 12% of salary as presently legislated.

Doing so might further boost retirement incomes (especially among those low and middle earners unable to compensate for the higher contributions by winding back other savings), but at the expense of providing lower incomes while working.

As the Henry Tax Review noted, higher compulsory super contributions are ultimately funded by lower wages than would have been the case, meaning lower living standards while in work.

As it happens, higher contributions would do little to change the retirement incomes of low and middle income Australians. Their extra superannuation income they provided would cut their age pension payments.




Read more:
The superannuation myth: why it’s a mistake to increase contributions to 12% of earnings


Higher compulsory contributions would also damage pensions in another way.

The age pension is indexed to wage growth which would be lower if employers diverted a steadily increasing proportion of their employee budget to super.

It means the most fervent opponents of a lift in compulsory super contributions from 9.5% to 12% ought be those people presently on the age pension.

The government ought to oppose it as well. Diverting more of what would have been wages to more lightly taxed super will strain its budget. Scrapping the proposed increase would save it an impressive A$2 billion a year.

We can find better ways to help retirees

Even if governments did feel it necessary to boost retirement incomes, lifting compulsory super contributions would be one of the worst ways to do it.

Loosening the age pension assets test taper could boost retirement incomes of around 20% of retirees, climbing to more than 70% over time. It would cost the Budget just A$750 million a year – less than half the cost to it of the proposed increase in compulsory super.

The real priority – by far the biggest bang for the buck in alleviating poverty in retirement – should be boosting Commonwealth rent assistance by 40%, providing an extra $1,410 a year for retired singles and $1,330 for retired couples.




Read more:
Renters Beware: how the pension and super could leave you behind


Senior Australians who rent privately are much more likely to suffer financial stress than homeowners. And renting will become more widespread as younger generations on low incomes find themselves less able to afford homes.

Australians have been told for decades that they’re not saving enough for retirement. Such claims are inconsistent with the facts. Most of today’s workers can already expect a comfortable retirement. Forcing them and future workers to save more money for retirement that they’ll never spend is simply a recipe for larger bequests.The Conversation

Brendan Coates, Fellow, Grattan Institute; John Daley, Chief Executive Officer, Grattan Institute, and Jonathan Nolan, Associate, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Renters Beware: how the pension and super could leave you behind



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Super and the pension treat most retirees well, but not renters.
Shutterstock

Rafal Chomik, UNSW

How we fund retirement in an ageing century ought to worry all of us.

But one group of us should be much more worried than the rest.

In a new set of research briefs published by the Centre of Excellence of Population Ageing Research, we report that most people do well out of our retirement income system and that the living standard of retirees has improved over the past decade.

In international comparisons, our system ranks highly, for good reason.

Most retirees do well

About 60% of older Australians can afford a lifestyle better than that deemed to be “modest” by widely used standards.

Households headed by baby boomers reaching retirement age between 2006 and 2016 did so with incomes 45% higher than those who retired a decade earlier.

Typical boomer households aged in their late 60s earn almost as much as they did when they were still working – only 20% less, that is, with about 80% of their working income maintained.

And their needs are lower. Lower spending in retirement is common because older households need to pay less for transport, less for working clothes, and have more time to cook.

Many continue to save while in retirement.




Read more:
Please, not another super scheme, Mr Keating. It’s what the pension is for


And they tend to spend less over time, rather than more over time as benchmarks publicised by the superannuation industry assume.

When we included the value of living rent-free for the 80% or more of retirees who own their own home (about A$10,000 per year on average), we found older Australians live in no more poverty than working age Australians.

But not renters

The living standards of those who rent in retirement are very different. Only about 15% of older renters can afford a lifestyle better than “modest”.

Single renters are particularly badly off.

Among all older people only about 10% fall below the poverty line set at half the median income.

Among older Australians who rent, 40% fall below.

Among older Australians who rent alone, it’s more than 60%.


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If that relative poverty measure seems too abstract, an absolute dollar figure might help.

Alarming research aired on the ABC in September found that, on average, aged care homes were spending $6.08 per day on food per resident.



Our research finds that among pensioners who rent alone, one quarter spend even less than that per day.

And it’s getting worse

The pension has always favoured home owners.

On the one hand it is insufficient for renters and on the other it doesn’t cut pension payments to the owners of very valuable homes, because the value of any home – no matter how big – is excluded from the pension means test.




Read more:
Let’s talk about the family home … and its exemption from the pension means test


Rental assistance, introduced to complement the pension in the 1980s, was meant to alleviate this, and to some extent it does.

But it climbs only in line with the consumer price index every six months, which usually fails to keep pace with rents.




Read more:
Life as an older renter, and what it tells us about the urgent need for tenancy reform


Sydney rents have doubled over the past two decades. The consumer price index has climbed 68%.

As a result, rental assistance is less effective in reducing financial stress than it was when it was introduced, and is set to become even less effective if rents continue to climb more quickly than the price index.

And more of us look set to rent

Households headed by Australians aged 35 to 44 are now 10 percentage points less likely to own their own home than were households headed by people of the same age a generation earlier.

They might be merely postponing buying homes until they are older as more of what would have been their income is sequestered into super and they enter the workforce and retire later.




Read more:
Explainer: what’s really keeping young and first home buyers out of the housing market


If so, they might end up owning and paying off homes by retirement at the same rate as boomer households did before them.

If not, more and more of them could end up in poverty in retirement.The Conversation

Rafal Chomik, Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Shorten proposes investment bank to help Pacific nations’ development


Michelle Grattan, University of Canberra

Bill Shorten is flagging that Labor would set up a government-backed infrastructure investment bank to promote concessional financing for nation-building projects in the Pacific.

In a speech to the Lowy Institute on Monday – part of which has been released beforehand – Shorten says Australia’s Pacific neighbours want partners for infrastructure projects – “and as prime minister, I
intend to make sure they look to Australia first.

“I see this as a way Australia can elevate our status as a ‘partner-of-choice’ for Pacific development and enhance security and prosperity in the region,” he says.

In government, the ALP would put the Pacific “front and centre” in its regional foreign policy, Shorten says.

It would grow Australia’s aid commitment to the Pacific. But while development assistance is critical “our agenda for engagement needs to be bigger and broader than that”.

“We should be encouraging others, including private firms, to invest in projects that drive development in the region: from roads and ports to water supply, communications technology and energy infrastructure.

“New Zealand are already doing this, the United States and Japan are also exploring their options. Australia should be too.

“My vision is for Australia to actively facilitate concessional loans and financing for investment in these vital, nation-building projects through a government-backed infrastructure investment bank.”

Shorten does not spell out the detail of the proposed bank, which his office said would encompass projects in the wider Indo-Pacific region, but with its main emphasis on the Pacific. Planning appears to be in
its early stages.

In his speech Shorten, stressing the diversity of nations in the Pacific, says a Labor government would engage with these countries “through partnership, not paternalism”.

“We will listen, knowing that for our Pacific neighbours, sustainable development and poverty reduction are more than economic concerns. And
we must strive to understand the socio-cultural dimensions which impact these issues.”

Labor would upgrade the position of minister for Pacific affairs, which has recently been downgraded to an assistant minister. Labor’s minister would coordinate Pacific strategy and programs across
government.

“We will engage with the Pacific not through the intricacies of geopolitics – but in its own right. Our goal will not be the strategic denial of others but rather the economic betterment of the ten million
people of the Pacific islands themselves,” Shorten says.

Criticising Scott Morrison’s decision not to attend the recent Pacific Islands Forum, which was held immediately after he became prime minister, Shorten says this was “part of a pattern of neglect of the
Forum by Coalition prime ministers”.

The opposition leader also argues that Labor is better able than the Coalition to chime in with the Pacific countries’ concerns about climate change.

“No community of nations are more concerned about climate change – with better reason – than our Pacific neighbours. Rising sea levels are an existential threat for these nations, ” he says.

“Under a Labor government, Australia will be much better placed to help our neighbours respond and to press their case internationally because we accept the science of climate change – and we accept the need for real action.”

Morrison repeatedly has given as one reason for resisting the push from the right for Australia to exit the Paris climate agreement that the climate issue is of major concern to Pacific countries which are in turn strategically important to Australia.

POSTSCRIPT: Government takes new hit in Newspoll: ALP leads 54-46%

The government and Prime Minister Scott Morrison have slipped in the latest Newspoll, published in Monday’s Australian.

Labor has widened its two-party lead to 54-46%, compared with 53-47% a
fortnight ago. On primary votes, the Coalition has dropped a point to
36%; Labor has gained a point to 39%. The Greens are down from 11% to
9%.

Morrison’s satisfaction rating has fallen 4 points to 41% while
dissatisfaction with his performance is up 6 points to 44%. This gives
him a net negative rating for the first time.

But he retains a healthy head over Bill Shorten as better prime
minister – 43-35%, although the gap has narrowed from 45-34%.

Satisfaction with Shorten is up 2 points to 37%; his dissatisfaction
rating is 50%, down a point.

The latest results come in the wake of the Liberals’ loss of Wentworth
to independent Kerryn Phelps, which has produced a hung parliament.
Previously Morrison had been clawing back from the government’s
disastrous deterioration in the poll after the removal of Malcolm
Turnbull, but that apparent small improvement has now been set back.

The poll found that 58% want the government to run full term rather
than call an early election.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Infrastructure splurge ignores smarter ways to keep growing cities moving


Marion Terrill, Grattan Institute

This week we’re exploring the state of nine different policy areas across Australia’s states, as detailed in Grattan Institute’s State Orange Book 2018. Read the other articles in the series here.


It’s already started. We may be only entering the formal election campaign in Victoria tonight, but massive transport announcements are in full swing from the state Labor government, the Coalition opposition and the Greens. And with an election due next March in New South Wales, we can be sure the major parties in that state won’t be far behind.

Expanding the capacity of the transport network always gets far more attention than other ways of managing a fast-growing population. In reality, though, governments have a far bigger menu of options to keep Australia’s capital cities moving – and they should use them all.




Read more:
We hardly ever trust big transport announcements – here’s how politicians get it right


Big spending promises all round

The swag of promises in Victoria to date has been big on rail. The Andrews government would, if returned, build a 90km suburban rail loop connecting all major suburban lines. Work is to start in 2022 at an announced cost of A$50 billion.

A Matthew Guy-led Coalition government would, if elected, build high-speed-rail to regional cities. The first trains would come into operation within four years, at an announced cost of A$15-19 billion.

And the Greens? They would upgrade suburban rail signalling and add 100 extra high-capacity trains, at a cost of A$8.5 billion.




Read more:
Missing evidence base for big calls on infrastructure costs us all


If talkback radio is any guide, these plans are popular. People love the idea of a magnificent new rail system that perhaps they’ll use or, more likely, that they hope all those people who currently clog up the roads will use instead. After all, Melbourne is a very car-dependent city. And, with three-quarters of all the jobs dispersed all over the city, that’s unlikely to change much any time soon.

People also love big new infrastructure because it feels as though it comes for free. While a politician may have to pick just one from a menu of large projects, voters don’t have to confront this kind of choice.

Rather, we face the difference between a new station or service near our home, or no such new station or service. If you are the beneficiary of a new rail service, you may support the candidate promising it. By contrast, the losers are dispersed, and it’s hard to get too agitated about services we never had.

Look more closely at what is happening

But new transport infrastructure is far from the only way to cope with population growth. Even though Melbourne has had extremely high population growth, averaging 2.3% a year over the five years to 2016, commuting distances and times have remained remarkably stable.

The median commute distance for Melburnians barely increased, from 8.6km to 8.7km, over the five years to the most recent Census in 2016. The median commute time has remained at 30 minutes each way since 2007.

Notes: Working-age respondents to the Hilda Survey report commuting times for a typical week. These are converted here to times for an individual trip. BITRE (2016) finds that the travel times HILDA respondents report closely match other measures of travel times, further supported by Grattan analysis of Transport for Victoria (2018).
Source: Grattan analysis of HILDA (2016), Author provided



Read more:
Our fast-growing cities and their people are proving to be remarkably adaptable


These stable commute times and distances have coincided with a period of only limited new infrastructure construction. Victoria’s additions – Regional Rail Link, Peninsula Link and the M80 Ring Road – are modest compared to Queensland and NSW’s. The road stock in Melbourne increased by 4.3% over the five years to 2015, significantly less than the population increase of 11.9%.

The A$1.3 billion CityLink Tullamarine widening project finished recently, and the A$8.3 billion level crossing removal project is more than half-completed, but these projects are too new to explain the remarkable stability of commutes over the period of booming population.

Despite only modest new infrastructure, people have adapted. Some have changed job or worksite, and working from home is on the rise. Some people moved house, or even left the city. And some changed their method of travel, leaving the car at home and catching the train, tram or bus to work. Other people simply accepted a longer commute, at least for a time, and particularly if they were earning more.

Of course, not everyone is better off when the population grows rapidly. Some people elect not to take a new job that’s too far from home; some pay higher rent, or cannot afford a place they once could have. But the lesson from Melbourne is that people are not hapless victims of population growth, depending for their well-being on governments building the next freeway or rail extension.

So what are the best ways to help cities cope?

The Grattan Institute’s State Orange Book 2018 recommends that governments work with, not against, the adaptations that people make. Here are three ways state governments can help:

  1. They should stop making it so hard to move house, by replacing stamp duty with a broad-based land tax.
  2. They should stop locking new residents out of their preferred locations, by combining a relaxation of zoning restrictions on residential density with clear assignment of on-street parking rights.
  3. The incoming governments of Victoria and NSW should introduce time-of-day road congestion charges in the most congested parts of Melbourne and Sydney (offset by a cut to vehicle registration fees), with the funds earmarked for public transport improvements.

Let’s see what the vying parties can do.The Conversation

Marion Terrill, Transport Program Director, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The internet has done a lot, but so far little for economic growth


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The internet is everywhere, except in the economic growth figures.
Shutterstock

Chris Doucouliagos, Deakin University and Tom Stanley, Deakin University

The internet is transforming every aspect of our lives. It has become indispensable. But, so far, according to a new meta-analysis we have published in the Journal of Economic Surveys, the internet has done next to nothing for economic growth.

Vast resources have been thrown at information and communication technologies. Yet despite exponential growth in ICT and its integration into almost all aspects of our lives, economic growth is not demonstrably faster (and at the moment is demonstrably slower) than it was beforehand.

As Nobel Prize-winning economist Robert Solow famously put it, “you can see the computer age everywhere but in the productivity statistics.”




Read more:
What is 5G? The next generation of wireless, explained


This productivity paradox has caused angst and raised questions about whether the trillions invested in ICT could have been better invested elsewhere.

Our study of studies

We reassessed ICT through a meta-analysis of 59 econometric studies incorporating 466 different observations in both developed and developing countries. We divided ICT into three categories: computing, mobile and landline telephone connections, and the internet. For developed countries, we found that computing had had a moderate impact on growth. Mobile and landline telephone technologies also had a small effect.




Read more:
How landline phones made us happy and connected


But the internet has had no effect, at least not as far as can be ascertained from the research to date.

The promise not yet delivered

Ever since the Industrial Revolution, innovation and technological change have driven rising productivity and economic growth.

Information and communications technologies ought to follow in those footsteps.

Instead, productivity growth in US manufacturing has slid from 2% per year between 1992 to 2004 to minus 0.3% per year between 2005 and 2016.

Where ICT innovations do lead to an increase in productivity, it’s often a one-off boost rather than an ongoing increase year after year.

Where the internet sends us backwards

More disquieting, there is some evidence suggesting that rather than contributing to economic performance, some parts of ICT can harm it.

The internet can be an enabler of procrastination. Cyberslacking can take up to three hours of work a day.

It isn’t all bad. Many of us get a lot of joy from catching up on social media and watching dog and cat videos. But if everyone is distracted by it, little gets done.




Read more:
Ten reasons teachers can struggle to use technology in the classroom


The internet has also enabled greater flexibility in work, another plus. But if it contributes little to economic growth, it is worth asking whether our economic managers should continue to fund its expansion.

No saviour for developing nations

For developing countries, generating economic growth is pressing because resources are scarce. ICT has been held out as a saviour.

Yet, it has almost always been found that more obvious innovations, such as running water, electricity, and primary education for girls, have bigger payoffs.

Our own findings show that developing countries benefit from landline and mobile phone technologies but not at all from computing, at least not yet. ICT might need to reach a critical size before its effects matter.

But maybe later, down the track

The time it takes for ICT investment to generate economic growth might be longer than expected, and it might need to reach an even bigger critical mass before that happens.

But it’s hard to avoid the conclusion that, for the immediate future, growth will continue to depend upon more traditional sources: trade between nations, education, new ideas, the rule of law, sound political institutions, and curtailing inequality.




Read more:
How rising inequality is stalling economies by crippling demand


Unfortunately, these are under threat from growing nationalism and protectionism in the United States and elsewhere. The evidence to date suggests that we would be better off fighting those threats than investing still more in an information technology revolution that has yet to deliver.The Conversation

Chris Doucouliagos, Professor of Economics, Department of Economics, Deakin Business School and Alfred Deakin Institute for Citizenship and Globalisation, Deakin University and Tom Stanley, Professor of Meta-Analysis, Deakin University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Government to set up new multi-billion Future Drought Fund


Michelle Grattan, University of Canberra

Prime Minister Scott Morrison will announce a Future Drought Fund, that will grow to $5 billion over a decade, at Friday’s national drought summit.

The fund is to provide support against future droughts, helping primary producers, non-government organisations and communities prepare for and respond to their impact.

It will be given an initial $3.9 billion injection, and will expand to $5 billion by 2028. The funding will be managed by the Future Fund Board of Guardians.

From 2020, about $100 million annually will be available, with payments starting on July 1, 2020.

Morrison has made dealing with the impact of drought one of his priorities since becoming prime minister, with various immediate measures for the current dry.

The summit will be attended by all levels of government, and representatives of farming and agribusiness, banking and finance services, and community and charitable organisations, as well as experts.

The special envoy for drought, Barnaby Joyce, and the coordinator-general for drought, Major General Stephen Day, will speak, while the Bureau of Meteorology will brief on present conditions and the projected outlook.




Read more:
Politics Podcast: Barnaby Joyce on facing the drought and rural women


The planned fund will provide community services and research, and assist the adoption of technology to support long-term sustainability in periods of drought, through capital or ongoing initiatives. It could include investments in local projects, infrastructure, and research.

The criteria for the type of projects to be supported have yet to be determined and the government says these would continue to change, depending on the drought and community response needed.

Initiatives to be supported by the fund would be decided as part of the budget process.




Read more:
Helping farmers in distress doesn’t help them be the best: the drought relief dilemma


Morrison said that in his visit to Quilpie in western Queensland, which he undertook immediately after becoming prime minister, he had been struck by “the strength, resilience and hope” displayed by the families.

“Our response to the drought has to be the same. Deal with the here and now, but also make sure we plan for the future.

“That’s what the Future Drought Fund is all about. Putting money aside for non-rainy days in the future,” he said.

“The fund will build over time, starting with an initial $3.9 billion up front. Part of the earning in the fund will be used to fund important water infrastructure and drought resilience projects, while the balance is ploughed back into the fund, so it grows to $5 billion over the next decade.

“This funding will support farmers and their local communities when it’s not raining.

“The challenges of drought vary from farm to farm, district to district, town to town and we continually need to adapt and build capacity – the Future Drought Fund gives us this opportunity,” Morrison said.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Soft power goes hard: China’s economic interest in the Pacific comes with strings attached



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Red star rising: China has clear strategic designs on the Pacific Islands region.
Shutterstock

John Garrick, Charles Darwin University

China’s economic expansion into the Pacific Islands region raises critical questions for both the islands and Australia. What happens if infrastructure loans by Chinese banks and authorised state enterprises to vulnerable Pacific Island nations cannot be repaid? What consequences of default can be anticipated? Are there military dimensions?

The Pentagon has warned of the “potential military advantages” flowing from Chinese investments in other countries. China rejects this assertion. But if it does ever want access to foreign ports to support naval deployments in distant waters, it is laying the ground work to get it.

Belt and Road moves on the Pacific Islands

China’s grand plan to more closely link countries across Eurasia and the Indian Ocean through trade deals and infrastructure projects is known as the Silk Road Economic Belt and 21st Century Maritime Silk Road (“Belt and Road”). The plan includes Pacific pathways.



CC BY-ND




Read more:
The Belt and Road Initiative: China’s vision for globalisation, Beijing-style


Along with Australia and New Zealand, seven Pacific Islands nations officially recognise the People’s Republic of China (PRC). Another six recognise the Republic of China (Taiwan). China’s strategy is both to counter Taiwan’s influence and further its own interests. It wants Pacific nations to support it in international forums. Vanuatu, for example, was the first country to support China’s claims to island territory in the South China Sea disputed with the Philippines.



CC BY-ND

The number of Chinese companies operating in the Pacific region has greatly increased since Xi Jinping came to power in 2012. Trade between China and Pacific Island nations has ballooned to more than A$10 billion.

While its influence is still not as great as that of the US or even Australia, China’s growing investments cover mines, hydro-electricity projects, fishing, timber, real estate and services. Over the past decade it has also lavished the region with $US1.8 billion ($A2.4 billion) in foreign aid, including $US175,000 worth of quad bikes for Cook Island parliamentarians.

The soft power of money

China argues Chinese investment is “tactful” – that it helps developing nations build needed infrastructure with “no-strings-attached”. It contrasts this to Western aid models that require governance measures and other performance indicators to be in place in relation to aid funding.

But the credit Chinese state banks are extending to impoverished developing nations also looks a lot like a form of “debt colonialism”. The fear is that China is using the loans as leverage to expand its military footprint.




Read more:
Why China’s ‘debt-book diplomacy’ in the Pacific shouldn’t ring alarm bells just yet


The Chinese loans typically offer a period of grace before an interest rate of 2-3% over 15-20 years is imposed. In Tonga, for example, China deferred loan repayments for a period after the International Monetary Fund warned it was at risk of debt distress. Repayments started again in 2018, reportedly at a higher rate than before.

Sri Lankan lessons

If Tonga and other Pacific Island nations default, China can enforce contractual conditions as a pretext to advancing wider strategic aims.

This is precisely what happened in Sri Lanka.

The Sri Lankan government had high hopes for the Hambantota Port Development Project, built by China Harbour Engineering Company, one of Beijing’s largest state-owned enterprises, and mostly funded by the state-owned Export–Import Bank of China. When the port failed to generate anticipated revenues, the government ended up owing China at least $US3 billion with no means to pay.

The Chinese then demanded a Chinese company take a dominant equity share in the port. The Sri Lankan government was also forced of hand over 15,000 acres of land around the port for 99 years.

Now China owns an Indian Ocean port strategically placed on one of the busiest shipping routes in the world.

Pacific interests

China has clear military interests in the Pacific. In 2014 Xi Jinping personally visited Fiji to sign memorandums of understanding including for greater military cooperation.

Australian intelligence sources allege China has been secretly negotiating to build a military base in Vanuatu. Both nations deny this. Such a base would give China a foothold for operations to coerce Australia and outflank the US and its base on Guam.

China’s “soft power” is being better resourced to influence foreign nations.
Its moves in the Pacific means the geopolitics of the region are hardening up.




Read more:
Fears about China’s influence are a rerun of attitudes to Japan 80 years ago


Globally, China’s rise has profound implications for international law and trade.

China naturally prefers bilateral relationships to leverage its power and advance its interests. It has steered away from multilateral dispute resolution, especially since the South China Sea arbitration, which ruled unanimously in favour of the Philippines. It has simply ignored the verdict and gone ahead turning the disputed rocky shoals into military outposts.

If China can ignore the legitimate claims of the Philippines, it can ignore the rights of the smaller and more fragile Pacific Island nations. Its actions flag its challenge to the international order Australia has long championed – one based on rule of law and political and economic liberalism.

Its influence is unlikely to promote democratic principles. Those holding those principles dear need to help the Pacific Island nations resist the lure of soft-power “incentives” promised with no strings attached.

There are definitely strings attached.The Conversation

John Garrick, Senior Lecturer, Business Law, Charles Darwin University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

All eyes on November’s G20 meeting as tensions between China and the US ratchet up



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Much attention will be on the next meeting between Chinese President Xi Jinping and US President Donald Trump at the G20 in late November.
AAP/EPA/Roman Pilipey

Tony Walker, La Trobe University

When G20 finance ministers met in Bali last week to review economic developments in the lead-up to the annual G20 summit, they could not ignore troubling signs in the global economy driven by concerns about an intensifying US-China trade conflict.

Last week’s slide in equities markets will have served as a warning – if that was needed – of the risks of a trade conflict undermining confidence more generally.

China’s own Shanghai index is down nearly 30% this year. This is partly due to concerns about a trade disruption becoming an all-out trade war.




Read more:
The risks of a new Cold War between the US and China are real: here’s why


IMF Managing Director Christine Lagarde’s call on G20 participants to “de-escalate” trade tensions or risk a further drag on global economic growth might have resonated among her listeners in Bali, but it is not clear calls to reason are getting much traction in Washington these days.

Uncertainties caused by a disrupted trading environment are already having an impact on global growth. In its latest World Economic Outlook, the IMF revised growth down to 3.7% from 3.9% for 2018-19, 0.2 percentage points lower than forecast in April.

IMF Managing Director Christine Lagarde has called on G20 members to
AAP/EPA/Made Nagi

The IMF is predicting slower growth for the Australian economy, down from a projected 2.9% this year to 2.8% next year. The May federal budget projected growth of 3% for 2018-19 and the following year.

Adding to trade and other tensions between the US and China are the issues of currency valuations, and a Chinese trade surplus.

In September, China’s trade surplus with the US ballooned to a record U$34.1 billion.

This comes amid persistent US complaints that Beijing has fostered a depreciation of the Yuan by about 10% this year to boost exports, which China denies.

These are perilous times in a global market in which the US appears to have shunned its traditional leadership role in favour of an internally-focused “America First” strategy.

So far, fallout from an increasingly contentious relationship between Washington and Beijing has been contained, but a near collision earlier this month between US and Chinese warships in the South China sea reminds us accidents can happen.

This is the background to a meeting at the G20 summit in Buenos Aires late in November between US President Donald Trump and Chinese President Xi Jinping. That encounter is assuming greater significance as a list of grievances between the two countries expands.

US Vice President Mike Pence’s speech last week to the conservative Hudson Institute invited this question when he accused of China of “malign” intent towards the US.

Are we seeing the beginning of a new cold war?

The short answer is not necessarily. However, a further deterioration in relations could take on some of the characteristics of a cold war, in which collaboration between Washington and Beijing on issues like North Korea becomes more difficult.

By any standards, Pence’s remarks about China were surprising. He suggested, for example, that Chinese meddling in American internal affairs was more serious than Russia’s interventions in the 2016 president campaign.

He accused Beijing of seeking to harm Republican prospects in mid-term congressional elections and Trump’s 2020 re-election bid. This was a reference to China having taken its campaign against US tariffs to newspaper ads in farm states like Iowa.

Soybean exports to China have been hit hard by retaliatory tariff measures applied by Beijing in response to a first round of tariffs levied by the US.

“China wants a different American president,” Pence said.

This is probably true, but it could also be said that much of the rest of the world – not to mention half of the US population – would like a different American president.

All this unsteadiness – and talk of a “new cold war” – is forcing an extensive debate about how to manage relations with the US and China in a disrupted environment that seems likely to become more, not less, challenging.

Australian academic debate, including contributions from various “think tanks”, has tended to focus on the defence implications of tensions in the South China Sea for Australia’s alliance relationship with the US.

This debate has narrowed the focus of Australia’s concerns to those relating to America’s ability – or willingness – to balance China’s regional assertiveness.

This assertiveness increasingly is finding an expression in China’s activities in the south-west Pacific, where Chinese chequebook – or “debt-trap” – diplomacy is being wielded to build political influence.

Australian policymakers have been slow to respond to China’s push into what has been regarded as Australia’s own sphere of influence.




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Despite strong words, the US has few options left to reverse China’s gains in the South China Sea


Leaving aside narrowly-focused Australian perspectives, it might be useful to get an American view on the overarching challenges facing the US and its allies in their attempts to manage China’s seemingly inexorable rise.

Among American China specialists, few have the academic background and real-time government experience to match that of Jeffrey Bader, who served as President Barack Obama special assistant for national security affairs from 2009-2011.

In a monograph for the Brookings Institution published in September, Bader poses a question that becomes more pertinent in view of Pence’s intervention. He writes:

Ever since President Richard Nixon opened the door to China in 1972, it has been axiomatic that extensive interaction and engagement with Beijing has been in the US national interest.

The decisive question we face today is, should such broad-based interaction be continued in a new era of increasing rivalry, or should it be abandoned or radically altered?

The starkness of choices offered by Bader is striking. These are questions that would not have entered the public discourse as recently as a few months ago.

He cites a host of reasons why America and its allies should be disquieted by developments in China. These include its mercantilist trade policies and its failure to liberalise politically in the three decades since the Tiananmen protests.

However, the costs of distancing would far outweigh the benefits of engagement to no-one’s advantage, least of all American allies like Japan, India and Australia.

None of these countries, in Bader’s words, would risk economic ties with China nor join in a “perverse struggle to re-erect the ‘bamboo curtain’… We will be on our own”. He concludes:

American should reflect on what a world would be like in which the two largest powers are disengaged then isolated from, and ultimately hostile to each other – for disengagement is almost certain to turn out to be a way station on the road to hostility, he concludes.

Bader has been accused of proffering a “straw man argument’’ on grounds that the administration is feeling its way towards a more robust policy, and not one of disengagement. But his basic point is valid that Trump administration policies represent a departure from the norm.




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At the conclusion of the IMF/World Bank meetings in Bali, Christine Lagarde added to her earlier warnings of “choppy” waters in the global economy stemming from trade tensions and further financial tightening. She said:

There are risks out there in the system and we need to be mindful of that…bIt’s time to buckle up.

That would seem to be an understatement, given the unsteadiness in the US-China relationship and global geopolitical strains more generally.The Conversation

Tony Walker, Adjunct Professor, School of Communications, La Trobe University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The Senate is set to approve it, but what exactly is the Trans Pacific Partnership?


Pat Ranald, University of Sydney

These days it is called the TPP-11 or, more formally, the Comprehensive and Progressive Agreement for Trans Pacific Partnership.

It is what was left of the 12-nation Trans Pacific Partnership after President Donald Trump pulled out the US, after a decade of negotiation, in 2017.

Still in it are Australia, New Zealand, Canada, Mexico, Peru, Chile, Japan, Brunei, Singapore, Malaysia and Vietnam. It’ll cover 13% of the world’s economy rather than 30%.

What’s in it for us?

It is hard to know exactly what it will do for us, because the Australian government hasn’t commissioned independent modelling, either of the TPP-11 before the Senate or the original TPP-12.

A report commissioned by business organisations, including the Minerals Council, the Business Council, the Food and Grocery Council, the Australian Industry Group and the Australian Chamber of Commerce and Industry, finds the gains for Australia are negligible, eventually amounting to 0.4% of national income (instead of 0.5% under the TPP-12).

The report says:

The reason is simple:
Australia already benefits from extensive past
liberalisation, especially with Asia-Pacific partners.

But it says bigger gains would come from expanding TPP-11 to many more members, all using “common rules” and the same “predictable regulatory environment”.

Gradual deregulation

Setting up that predictable environment takes an unprecedented 30 chapters, covering topics including temporary workers, trade in services, financial services, telecommunications, electronic commerce, competition policy, state-owned enterprises and regulatory coherence.

Most treat regulation as something to be frozen and reduced over time, and never increased.




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The Trans-Pacific Partnership is back: experts respond


It’s a regime that suits global businesses, but will make it harder for future governments to re-regulate should they decide they need to.

Our experience of the global financial crisis, the banking royal commission, escalating climate change and the exploitation of vulnerable temporary workers tells us that from time to time governments do need to be able to re-regulate in the public interest.


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International ISDS tribunals

And some decisions will be beyond our control. In addition to the normal state-to-state dispute processes in all trade agreements, the TPP-11 contains so-called Investor-State Dispute Settlement (ISDS) provisions that allow private corporations to bypass national courts and seek compensation from extraterritorial tribunals if they believe a change in the law or policy has harmed their investments.

Only tobacco cases are clearly excluded.

ISDS clauses will benefit some Australian-based firms. They will be able to take action against foreign governments that pass laws that threaten their investments, although until now there have been only four cases. John Howard did not include ISDS in the 2004 Australia-US FTA, following strong public reaction against it.




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When trade agreements threaten sovereignty: Australia beware


Known ISDS cases have increased from less than 10 in 1994 to 850 in 2017, and many are against health, environment, indigenous rights and other public interest regulations.

If, after the TPP-11 is in force, a future government wants to introduce new regulations requiring mining or energy companies to reduce their carbon emissions, it is not beyond the bounds of possibility that companies headquartered in TPP-11 members might launch cases to object.

Legal firms specialising in ISDS are already canvassing those options.

Even where governments win such cases, it takes years and tens of millions of dollars in legal and arbitration fees to defend them. It took an FOI decision to discover that the Australian government spent $39 million in legal costs to defend its tobacco plain packaging laws in the Philip Morris case. The percentage of those costs recovered by the government is still not known.

A limited role for parliament

The text of trade agreements such as TPP-11 remains secret until the moment they are signed. After that it’s then tabled in parliament and reviewed by a parliamentary committee.

But the parliament can’t change the text. It can only approve or reject the legislation before it.




Read more:
Sovereign risk fears around TPP are overblown


In another oddity, that legislation doesn’t cover the whole agreement, merely those parts of it that are necessary to do things such as cut tariffs.

The parliament won’t be asked to vote on Australia’s decision to subject itself to ISDS, or on many of the other measures in the agreement that purport to restrict the government’s ability to impose future regulations.

Could Labor approve it, then change it?

In the midst of internal opposition to TPP-11, the Labor opposition has decided to endorse it and then try to negotiate changes if it wins government.

In government it has promised to release the text of future agreements before they are signed, and to subject them to independent analysis.

And it says it will legislate to outlaw ISDS and temporary labour provisions in future agreements.

But renegotiation won’t be easy. Labour will have to try to negotiate side letters with each of the other TPP governments. If the TPP-11 gets through the Senate, Labor is likely to be stuck with it.The Conversation

Pat Ranald, Research Associate, University of Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

States want the GST guarantee set in legislative stone


Michelle Grattan, University of Canberra

The government hoped to have the pressure on Labor over planned legislation for a new GST carve up but instead it has found itself on the back foot.

At a meeting of state and territory treasurers on Wednesday, there was a general demand across the political spectrum for the legislation to include a guarantee that no jurisdiction will be worse off.

NSW Liberal Treasurer Dominic Perrottet said after the meeting that “all states and territories put forward the strong view” the bill must include this.

“Unfortunately the Commonwealth indicated it would proceed with legislation without that guarantee,” he said.

He said that under the federal government proposal “there are a number of scenarios where NSW would lose substantial funding.

“That is not an acceptable outcome,” Perrottet said.

“In the weeks ahead I will be making every effort to ensure any Commonwealth legislation includes the guarantee the Prime Minister and the Treasurer have previously given – that our state will not be worse off.”

Federal Treasurer Josh Frydenberg said the legislation would be introduced in the next parliamentary sitting week. He reaffirmed that, “based on the Productivity Commission’s data”, the deal “will make every state and territory better off. This will guarantee an extra $9 billion in funding over the next 10 years”.

Frydenberg said the government was not including the guarantee in the legislation because “we don’t want to run two sets of books … the old system and the new system.”

If the government does not give way beforehand, the issue of the guarantee will likely become one for the Senate.

The new distribution for GST revenue is driven by the need to give Western Australia a fairer share. To win the support of the other jurisdictions the government announced the $9 billion in extra funding, to make for winners all round. But the states are concerned that if the guarantee is not in the legislation, unforeseen circumstances could arise that might disadvantage them.

Anxious to bed down the new GST arrangement without the need to get agreement from all jurisdictions, the government resorted to the unusual course of legislation – only to then run into Wednesday’s problems.

Victorian Labor Treasurer, Tim Pallas said the lobbying would continue to have the guarantee “enshrined in legislation”.

Queensland Labor Treasurer, Jackie Trad said that without the legal guarantee there was a “real risk” some jurisdictions could be worse off in certain circumstances. “We cannot prepare or forecast or model every single scenario.”

The South Australian and Tasmanian Liberal treasurers also declared they wanted legislated protection.

Shadow treasurer Chris Bowen said: “It’s a particularly special day when Josh Frydenberg offers an additional $9 billion in GST top up payments and still manages to get every state and territory Treasurer united against him.”

Bowen said Morrison promised when treasurer that no state would be worse off under the changes. “But he’s been called out this week for the government’s legislation failing to match this guarantee”.

Labor’s position is that it supports legislating the new distribution but wants the guarantee included. Morrison has been challenging Bill Shorten to back the legislation.

While there was a fight over the GST distribution legislation, there was unity over removing the GST on tampons from the start of 2019, ending a battle that began when the tax was introduced.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.